Inventory Management

Running a business can be challenging, often requiring long hours and dedication, financial losses, and mistakes. Many business owners tend to give up after the first difficulties. Statistics show that 1 out of 4 small businesses close after 1 year of operation, and only 25% of all businesses survive the first 15 years.
According to Forbes statistics, the common reason for small business failure is a lack of structure, particularly in inventory management. This is true for all physical products, from fasteners to clothing.

Inventory Management Overview

First, let's discuss what inventory management is and why it's essential. Inventory is essentially everything you sell, your most important asset. Inventory management is a system you use to store, order, and distribute your goods. Different businesses use various methods and systems based on their specific needs. This article will share some tips and an overview of various methods.
Benefits of Inventory Management:

Customer Satisfaction: It's frustrating for both the customer and the business when an item is out of stock, especially when it's urgently needed. And if the customer can just go to another company, you as a business might lose the long-term partner.

Accurate Accounting: Proper inventory management provides a clear picture of a company's assets, making it easier to track inventory value, calculate costs, and prepare financial statements.

​Minimize costs: If the flow of products is organic, it minimizes the loss of product, overconsumption, and waste.

​Methods

​Now, let’s overview various methods of inventory and their pros and cons.
1. Just in time. 
This system works by ensuring that the company stocks only the most relevant products for its manufacturing process. While this system won't work for everyone, it's most suitable for manufacturing businesses with stable demand and industries with high-quality standards and low defect rates. The most popular companies using this method are Apple, Toyota, and Dell.
From the pros of this system, we can highlight that minimal stock on hand reduces storage and holding costs, and there's a strong focus on efficiency and waste reduction.
2. Economic order quantity. 
That method helps decide how much product to order at once, reducing future spending and saving time. Walmart and Amazon use this method, indicating that it can be suitable for companies that purchase large quantities of a single product. However, that method is not recommended for companies with fluctuating demand.
3. First-in-first-out.
This method is the best choice for grocery stores and pharmacies, or in other words, the companies with products of fast spoilage, because of its focus on selling goods that first came into stock and only then proceeding with the newer ones. That system might not be ideal for products with long shelf lives or high-value items.
4. Last-in-last-out.
The opposite of FIFO, this method can be best used by the automotive and oil industries or companies with high-value products that can quickly lose their value. The biggest advantage of LIFO is that it helps to reduce the tax, especially during inflation periods.
5. Materials Requirement Planning.
This method fully depends on the demand forecast. So, proper inventory management systems and professionals are necessary for the success of this method; from its pros, we can highlight effective customer demand, cost reduction, and optimal resource utilization. That method is not for everyone, especially with unstable business and demand, because inaccurate forecasts can lead to inefficiencies and overstocking with unnecessary items. Industries that can use it are manufacturing businesses with complex production processes and companies with multiple product lines. The most popular companies using this system are Flextronics and Northrop Grumman.
6. ABS analysis.
This method divides the products into categories, like A, which is highly valued, and BC, which is less valued. They can also sometimes be divided by purchase frequency. ABC analysis is mostly used in complex manufacturing industries like Boeing. It helps prioritize inventory, allocate resources effectively, and reduce costs, but it requires control and accurate information.
7. Days sales Inventory.
​This method is most used by fast-moving consumer goods companies, like retailers and wholesale distributors. It is based on a formula to calculate how much time it takes to convert the inventory they have into sales. That won’t work for seasonal items, unstable demand, or various demand as it is based on the analysis of previously sold items.

Tips

​Tips for the most efficient inventory management.
1. Inventory management software.
The tech market is growing rapidly so even the small business can stop relying on excel spreadsheets and adopt user-friendly Inventory Management Systems (IMS). Proper software can not only reduce time and errors but also lead to more efficient ordering and cost reduction.
2. Demand analysis.
This advice comes from the previous one, as the proper software can help with the demand forecast by analyzing historical data and market trends to predict future demand more precisely. By analyzing historical sales data, market trends, and seasonal variations, you can make informed decisions about purchasing and production.
3. Frequent inventory checks.
Our advice is to conduct regular inventory counts and checks to understand the full picture of current products. It's also important to identify old and close-to-expiration-date products and take actions to reduce costs, such as putting them on sale.
4. Organized warehouse.
A well-organized warehouse is essential for efficient operations. Clear labeling, proper storage, and a well-designed layout can minimize search time and reduce the risk of errors.
5. Invest in new technologies.
Technology can significantly enhance inventory management. AI-powered tools can automate tasks, optimize inventory levels, and provide valuable insights. Cloud-based solutions offer flexibility and accessibility, allowing you to manage your inventory from anywhere. Read more about technologies and their role in modern procurement in our previous article.
6. Customize your approach.
Every business is unique. Experiment with different inventory management methods and formulas to find the best fit for your specific needs.

Conclusion

​Inventory management might be a complex process, but it is necessary for the long-term success of the business. Remember that the key to effective inventory management is finding the right balance between minimizing costs and meeting customer demand. By implementing these strategies and leveraging technology, businesses can optimize their inventory processes and achieve greater success.